Next Hot Investment Abroad

by | Jan 1, 2005 | Archives

Dear International Friend,

All the financial press now tells us that Argentina is a basket case. Infact the reality may be even worse as the report from George Buxton at Bear, Stearns & Co. wrote:

“We assess Argentina's ability to service its bond debt based on assumptions of the size of the economy and fiscal performance going forward. Assuming official sector debt does not get restructured, we calculate that the fiscal room Argentina has to pay interest on bond debt is very low relative to the size of the debt.

“Based on this assessment, we believe that the debt restructuring that is being implicitly assumed by the marketplace, based on current prices for Argentine debt, is substantially over-optimistic.

“Our analysis of a hypothetical debt restructuring that is consistent with Argentina's ability to pay suggests that Argentine debt should not trade above $12-$13, in contrast to the $20-$22 currently quoted.”

So as bad as Argentina seems, events may even be worse. This means I am getting interested!

Those who have been reading my reports for many years know that my interest in Ecuador really peaked when the country had its worst economic disaster in 1999. When the sucre (Ecaudor’s currency at that time) dropped from 3,000 sucres to 25,000 sucres per dollar, I started conducting real estate tours and urging investors to buy real estate there. I bought over 800 acres myself.

Prices since have skyrocketed. For example some beachfront lots near Manta which delegates on our tour bought for $2,500 per lot were recently selling for $17,500 and I expect they have even risen since then! That’s a 700% increase in just a couple of years.

Now that Ecuador’s economy is really rolling, you may note that I have eased off on these recommendations. You can understand this better by reading an article at Yahoo Finance

As the Argentine peso collapses, along with the economy, prices will falland the same great values will be created there. This is of such interest that I have asked my friend Steve Rosberg who lives in Buenos Aires to give us a report and explore the possibilities of conducting a real estate tour there. Here is what he has shared. He calls it “The Pampas Silver Lining”.

The Argentine crisis has been in the news for a long time. And still,despite the broad coverage, it is difficult to understand what actual conditions are like. It is not easy even for us who live here, and who are used to Argentina’s ups and downs. For foreigners at a distance, it is inconceivable.

The underlying cause, in broad terms, is that the country’s public sector has been living beyond its means. Why? Because the politicians rise to power to serve their own interests either by filling their pockets or by assigning “jobs” and handouts to their cronies and supporters. The resulting public deficit has been financed with borrowing and more borrowing. Until the day the lenders said “Enough!”This is where we are today.

Anticipating this end-of-borrowing, everybody has been taking money out of the country, for the experience has shown that at some point, the State will dip into the people’s savings. This they did in 2001, by forcing banks and pension funds to buy public bonds. Which only accelerated the rate of capital flight, causing banks to lose deposits rapidly.

In the political turmoil of December 2001, a series of poor economic decisions were taken. Deposits were frozen in the financial system. The ten-year old currency board was abandoned and the peso devalued. Time deposits and bank loans that had been established in US Dollars were converted to pesos. To go into more detail on measures and reactions would exceed the scope of this note and most probably, exhaust your patience.

There is no credit and most depositors won’t have access to their deposits until 2005 and then, only in devalued pesos, more about which later, unless they chose to swap them for a government bond maturing in 2012.

But the State continues to run a huge deficit, so any money that the people lay hands on, they convert to US Dollars.

This has caused the exchange rate to explode from 1 Peso = 1 Dollar to 3.7 Pesos = 1 Dollar, a loss of purchase power in Dollar terms of 73%. Prices have “only” gone up about 40% since the devaluation, so there is a lot of inflationary potential ahead.

Henry Smyth, a friend and asset manager from New York visited last month.

He was shocked at the local prices of everything. He called this the greatest bargain in tourism, with world class hotels, restaurants, entertainment, you name it. He is now considering coming back for the ski season ­ July to September, knowing that he will have a fantastic holiday for a fraction of what it would cost anywhere else.

But what has happened to real estate?Real estate values have remained the same or even fallen in Peso terms.

What this means is that in Dollars, prices are a quarter of what they were last year ­ and that was already way below 1998 values, when the recession began.

Incredible deals are to be had for those with cash.

Bargains in houses and apartments are available. For North American investors living far from Argentina, property is less attractive than a similar property in, Central America or Ecuador, as the travelling needed to visit them is substantial. Alos because of the recession rental incomes are meagre and unreliable.

The best deals are in rural real estate.

You can buy estancias for a fraction of their historical prices, properties on which you can raise the world renowned Argentine beef, or other livestock, or which are good for agriculture. Or go for a mix of landscape and production. Or go for a hunting reserve ­ last week, in the Province of La Pampa, I met some Americans who had just been hunting deer and wild boar. Or, if you are preservation minded, you can set up your own wildlife preserve, as many are already doing.

The beauty of it is that you can make a productive investment, have a wonderful retreat, and still make a great capital gain in the process.

This is very interesting to me and I have asked Steve to look at the possability of organizing an Argentine Real Estate tour late in the 2002 or early in 2003.

By then, the major economic upheavals should be slwoing and conditions reverting. When that happens, prices will skyrocket ­ as they have in Ecuador. This could be another once in a lifetime opportunity.

If you are interested in helping Steve with this, please let me know along the best time that you could travel, plus any particular interests you might have. In this way, if some of you would like to go down, we can schedule a tour for Argentina.

Until next message, good global investing!